%A Lei Ning, Yuqin Wang %T Quantitative Analysis of the COVID-19 Pandemic Shock to Household Consumption in China %0 Journal Article %D 2020 %J Front. Econ. China %J Frontiers of Economics in China %@ 1673-3444 %R 10.3868/s060-011-020-0015-4 %P 355-379 %V 15 %N 3 %U {https://journal.hep.com.cn/fec/EN/10.3868/s060-011-020-0015-4 %8 2020-09-15 %X

We study the impact of the COVID-19 pandemic shock on household consumption in China. Using household survey data, we find that the proportion of liquidity-constrained households increases quickly, but the constraint levels vary across distinct groups. We build a heterogeneous agent life cycle incomplete market model to analyze the long-run and short-run effects of the pandemic shock. The quantitative results reveal a slow recovery of consumption due to three reasons: hiking unemployment rate, declining labor productivity, and worsening income stability. The hiking unemployment rate plays the key role in households’ consumption reduction since it simultaneously leads to a negative income effect and upsurging precautionary saving motives. Our paper highlights the importance of maintaining a stable labor market for faster recovery.